Compiled & TechFlow by TechFlow
Guests : Arthur Cheong, Founder and CIO of DeFiance Capital; Jordi Alexander, Founder of Selini Capital and Chief Analyst of Mantle
Moderator : Laura Shin , writer and host of Unchained
Podcast source : Unchained
Original title : 2 Crypto Investors on Why They Believe DeFi Is Poised for a Bull Run
Air Date : October 16, 2024
Background Information
DeFi tokens have weathered many challenges in recent years, but are they now on the verge of a new bull run? In this episode, Arthur Cheong, founder and chief investment officer of DeFiance Capital, and Jordi Alexander, founder of Selini Capital and chief analyst at Mantle, discuss why they think DeFi is ready to take off. They break down DeFi's improvements in security and user experience, the impact of Layer 2 solutions on Ethereum, and whether Ethereum or Solana will lead the next bull run. They also explore whether the popularity of Memecoin will affect attention to DeFi, and why sustainable token economics are critical when evaluating tokens. Are DeFi tokens really ready to shine again?
Why Arthur thinks the DeFi rally is coming
DeFi’s maturity and market environment changes
Arthur believes that DeFi is preparing for a bull market, mainly based on several observations. He pointed out that since the summer of DeFi five years ago, the industry has undergone important changes, and people have gradually realized which methods are effective in DeFi and which are not. He compared this process with Gartner's hype cycle and believed that DeFi is currently in the stage of moving from "disillusionment" to "enlightenment". The industry has conducted a lot of experiments on different products and methods and finally found effective solutions.
In addition, Arthur also mentioned that changes in the macroeconomic environment will be beneficial to DeFi. He expects that interest rates will fall in the next six to twelve months, which will significantly reduce the opportunity cost of DeFi and on-chain activities. He believes that finance is still the largest market fit for cryptocurrencies, and DeFi will attract more capital inflows.
The connection between traditional finance and DeFi
Jordi also agreed with Arthur's point of view, emphasizing that DeFi is the product with the best market fit in the crypto space. He pointed out that as the efficiency of asset use increases, the application of DeFi will continue to grow. Although the exploration of real assets (RWA) has started small, there is still a lot of room for development. As supervision gradually becomes clear, more and more institutions will begin to conduct safe on-chain transactions.
DeFi’s response in a low interest rate environment
Laura asked whether the current macro environment would make DeFi more prominent in a bull market. Arthur responded that DeFi would be more sensitive to low interest rates than other areas. He pointed out that the high yields offered by DeFi would attract investors who are looking for higher returns when interest rates fall. In the past two years, many investors have chosen low-risk investment methods, but as interest rates fall, they will be more inclined to take risks in pursuit of additional returns.
Market Lessons and Future Opportunities
Jordi added that past market cycles have taught investors many important lessons. He mentioned that many low-cost fork projects of Uniswap or Aave were not taken seriously in this round, and only truly innovative and differentiated projects will be favored by investors. He said that some successful projects have emerged in DeFi, such as Pendle, which demonstrate the market's demand and recognition for innovation.
How DeFi security and user experience are evolving
Improved security
Arthur believes that DeFi has improved significantly in terms of security since 2021. He pointed out that security practices and user interface (UI) and user experience (UX) have made great progress. In the past four to five years, the user experience when using crypto wallets has improved significantly. He predicts that in the next two years, the need to manage seed phrase and private keys will be greatly reduced, and the popularity of smart wallets and embedded wallets will make it more convenient for users to interact on the chain.
Arthur also mentioned that many mature DeFi teams are paying more attention to security, which will reduce the probability of DeFi protocols being attacked or exploited. He mentioned that the new generation of smart contract layer 1 blockchains (such as Move language) are better designed than Solidity in terms of security, which shows that the industry has learned from past lessons.
Improved user experience
In terms of user experience, Arthur emphasized that DeFi has surpassed the performance of centralized exchanges in certain areas, such as lending. He pointed out that the total amount of assets deposited in DeFi has reached 20 billion US dollars, far exceeding the lending scale of any centralized exchange.
Education and transparency
Jordi added that in addition to security and user experience improvements, education is also an important aspect of DeFi development. He said that after the Luna incident, users have become more cautious about the source of stablecoin income, and many unreliable income products have lost their appeal. Users are now more concerned about the sustainability of income and are beginning to ask more constructive questions, which shows that the market is moving in a healthier direction.
He also mentioned that with the Ethereum merger and the launch of Eigenlayer, users' understanding of staking and re-staking is also deepening. This enables users to better utilize their Layer 1 assets, thereby improving the liquidity and availability of assets and laying the foundation for the further development of DeFi.
Can DeFi activities be sustained in the long term?
Activities and sustainability issues
Laura said that despite many improvements in the DeFi space, there are still questions about its long-term sustainability. She observed that many emerging protocols tend to experience a sharp drop in activity after introducing incentives. Users may quickly sell tokens after receiving airdrops instead of continuing to use these chains. This phenomenon has led her to think about whether DeFi activities can be sustained in the long run.
Performance of different protocols
Arthur believes that the sustainability of DeFi needs to be analyzed based on specific protocols. He pointed out that some mature protocols (such as Uniswap and Lido) are still able to maintain high levels of revenue with almost no incentives. This shows that some protocols have achieved sustainable usage models, while emerging protocols are working hard to gain market share through incentives.
He further explained that the incentives in DeFi are not limited to DeFi itself, and this phenomenon of points-grabbing is also common in Layer 1 protocols. Many new protocols will adopt radical incentives in the early stages to attract users and establish an initial market foundation.
Market response and user behavior
Jordi added that the market has realized that many incentive-based projects are not sustainable in the long term. He pointed out that the incentive-based projects launched in recent months tend to be sold off quickly, which shows that most of the participants are professional investors rather than ordinary users. These big players (whales) are able to identify unreasonable token valuations and sell at the right time.
He agrees with Laura that DeFi still lacks a sufficient user base, but as the user experience improves, the development prospects in the next few years are optimistic. Jordi believes that protocols that can provide a good user experience will have the opportunity to gain a foothold in the market.
Layer 2 Solutions: Help or Hurt Ethereum?
The Impact of Layer 2
Laura mentioned that there is a growing discussion about whether Layer 2 solutions have a parasitic effect on Ethereum. She pointed out that in addition to affecting Ethereum's underlying assets, the existence of Layer 2 may lead to decentralized liquidity. This triggered her thinking about the impact of Layer 2 on DeFi and the base chain.
Jordi's opinion
Jordi expressed his opinion on Layer 2, arguing that in most cases, Layer 2 is not parasitic. He pointed out that the reduction in fees on Layer 1 is not the main factor affecting the price of Ethereum. Although Layer 2 may cause some users to pay less attention to Ethereum, it does not mean that they are a threat to the overall Ethereum ecosystem.
He mentioned that when users use non-Ethereum chains, although they occasionally remember that these transactions are ultimately settled on Ethereum, their reduced direct interaction with Ethereum may lead to a decline in the perception of Ethereum. In addition, the lack of composability between Layer 2 makes them look less like a unified chain, which also affects user confidence.
Arthur's View
Arthur has a different view on this, and he believes that the current Layer 2 is indeed parasitic on Ethereum because they capture a large amount of fees that should have flowed to Ethereum. He pointed out that most of the fees paid on Layer 2 eventually flow to its sequencers, which are usually operated by the Layer 2 team itself and lack sufficient decentralization.
Arthur believes that the incentive mechanism of Layer 2 is not aligned with the interests of Ethereum. Most Layer 2 teams care more about their own tokens than the long-term value of Ethereum. He mentioned that as the valuation of Layer 2 tokens decreases, teams may be more inclined to prioritize their own interests rather than Ethereum.
About the Prospects of UniChain
Laura mentioned the recently announced UniChain, asking if it could solve the above problems. Arthur believes that as the largest DeFi application, UniChain’s success may lead to more activities moving to UniChain, thereby capturing more value, rather than dispersing it on Ethereum.
Will Ethereum or Solana Lead the Next Bull Run?
Laura's question
Laura mentioned that Ryan Berkmans recently said on the show that Ethereum will benefit from the market recovery in the long run. However, she noted that many people believe that this relationship is parasitic. She asked whether as DeFi recovers, will it only happen on Ethereum, or will it be done jointly between Ethereum and Solana, and even Solana's bull market prospects may be stronger.
Jordi's opinion
Jordi believes that the bull market will not be limited to a single chain. He mentioned that projects and applications usually consider liquidity and user base when choosing a chain. Ethereum almost monopolized this market during the bear market, while Solana successfully attracted a large number of users through its unique culture and rapid responsiveness, especially in Meme coins.
He pointed out that although DeFi is also important to Solana, if Ethereum's inter-chain composability and user experience are improved, then Ethereum will still be the main gathering place for funds, especially stablecoins and large users are still concentrated on Ethereum. Therefore, both chains have their own development paths.
Arthur's View
Arthur believes that the success of the bull run will be more widespread, but Solana and Base may achieve more success. He mentioned that Solana has performed well at the ecosystem level and successfully attracted new users, especially in terms of the success of Meme coins. He gave the example that the new mobile phone launched by Solana Labs sold out quickly because people knew that the value of the airdrop was often greater than the phone itself.
He also mentioned that Coinbase has done an excellent job in promoting the on-chain narrative and the "Summer on Chain" movement, and Base's user migration and activities have also been very successful. Base's TVL has reached hundreds of millions of dollars in a short period of time, which shows that Coinbase's resources and focus will make Base more successful in the future.
Jordi's comments
Jordi agreed with Arthur that Coinbase has successfully attracted many users to switch to on-chain transactions. He mentioned that other large exchanges are also working hard to educate users on how to use on-chain services, and Coinbase's success is still significant despite the lack of ecosystem tokens.
He also mentioned that UniChain may try to incentivize community development through token economics, which will be interesting to watch.
Should the Ethereum Foundation provide more support for DeFi?
Laura's question
Laura asked a question about whether Ethereum founder Vitalik really supports DeFi. She mentioned that Kane Warwick expressed concern that the Ethereum Foundation was not actively supporting DeFi. Vitalik once responded to criticism with a picture showing his support for DeFi. Laura asked whether everyone thought the Ethereum Foundation and Vitalik supported or opposed DeFi, and if so, what they could do to promote the development of DeFi.
Arthur's View
Arthur believes that the Ethereum Foundation is not against DeFi, but is not interested in DeFi's use cases. They believe that DeFi is already successful enough and does not need additional support. However, he believes that this strategy is wrong because other Layer 1 chains are taking advantage of this to compete for market share. He pointed out that DeFi's liquidity on Ethereum is already fragmented, making it more difficult to build DeFi on Ethereum.
Arthur further pointed out that the Ethereum Foundation failed to communicate effectively with DeFi developers when making changes to the technical roadmap, resulting in a slow response from the DeFi community to certain changes. He mentioned that there was a recent proposal on the minimum viable issuance that could affect the operation of DeFi, but the Ethereum Foundation did not seem to pay attention to the feedback from DeFi developers.
Jordi's opinion
Jordi agrees with Arthur and believes that Ethereum should become a financial center, not just a cultural center. He mentioned that the Ethereum ecosystem needs to attract infrastructure and investment to support higher-quality applications. He believes that DeFi is one of Ethereum's biggest successes and should be given more attention.
Jordi also mentioned that although Ethereum is already a mature system, it does not mean that developers do not need the support of the Ethereum Foundation. He said that developers should be able to support themselves, but if the Ethereum Foundation can communicate with the community earlier on technical changes, some unnecessary conflicts may be avoided.
Arthur's comments
Arthur further emphasized that DeFi is the most active part of Ethereum and should be given priority. He believes that although the Ethereum Foundation does not need to completely abandon support for other projects, it should be more proactive in supporting DeFi.
Laura's Summary
Laura concluded that although the Ethereum Foundation's support for DeFi seems to be not positive enough, it does not affect DeFi's performance in the future bull market. Arthur and Jordi believe that the revival of DeFi is not limited to Ethereum, and other chains such as Solana and Base will also play an important role. Overall, the development prospects of DeFi are still optimistic.
What social phenomena do MemeCoins reflect?
Laura raised a question about why Meme Coins have performed so well in this cycle. She mentioned that despite the opposition between Meme Coins and DeFi, Meme Coins seem to have become the "darling" of this cycle. She wanted to know what everyone thinks is the reason why Meme Coins have become a star in the market.
Jordi's opinion
Jordi believes that the popularity of Meme Coins reflects a rebellion against traditional venture capital (VC Coins). He mentioned that many VC-invested projects performed poorly, causing people to lose confidence in these projects. He also pointed out that society is in a state of high dissatisfaction, and many people hope to change their lives through speculation. Meme Coins have become a "lottery-style" escape, attracting a large number of people seeking to get rich quickly.
He described it as a "nihilistic" philosophy that reflected people's dissatisfaction with reality and their desire for speculation.
Arthur's opinion
Arthur added that Meme Coins and DeFi are somewhat opposite. DeFi projects usually have clear value capture mechanisms, while Meme Coins lack such mechanisms. He believes that Meme Coins can serve as a stress test for DeFi and the base layer, showing the animal spirits of the market. He likened this phenomenon to the stock market and believed that exchanges should support various trading activities, including Meme Coins.
Arthur also mentioned that Meme Coins as an asset class have been around for some time and have taken their place in the market. He believes that although the value capture mechanism of Meme Coins is not as clear as DeFi, they still have reasons to exist.
Jordi's comments
Jordi believes that the future of Meme Coins may be divided into two uses: one is as a speculative tool in online casinos, and the other is to become a financial asset of some online communities. He is skeptical about whether Meme Coins can reach the huge market value envisioned by Morad, believing that this requires a wider range of participants to enter the market.
Why Token Unlocking May Determine the Success or Failure of a Project
Laura raised a question about the relationship between Meme Coins and DeFi , asking how the future development of DeFi will be affected given the current strong performance of Meme Coins. She wanted to know whether new users would enter DeFi, or whether Meme Coins would compete with DeFi, or whether people would lose interest in Meme Coins.
Jordi's opinion
Jordi believes that the popularity of Meme Coins may promote the overall market activity. He mentioned that some current protocols perform well in Meme Coins transactions, although Meme Coins themselves may not be as mature as some DeFi projects. He pointed out that the unlocking mechanism of Meme Coins is similar to that of DeFi projects, but in his opinion, the liquidity and lock-up mechanism of Meme Coins are relatively loose, which may lead to greater price fluctuations.
He said that the continued unlocking will lead to an expected decline in the value of assets, and ordinary investors are frustrated by this situation. He believes that although Meme Coins may continue to rise, investor sentiment may be affected when the market returns to rationality and liquidity is insufficient.
Arthur's opinion
Arthur added that the existence of Meme Coins cannot be ignored and may have a positive impact on the use of DeFi. He mentioned that on Solana, many Meme Coins that graduated from platforms such as PancakeSwap are active in liquidity pools, which provides support for DeFi activities.
He believes that there may be more overlap between Meme Coins and DeFi investors. Investors who have received generous returns on Meme Coins may turn to look for DeFi projects with greater growth potential. He said that Meme Coins and DeFi can be complementary. Although ordinary investors' attention will still be focused on Meme Coins, institutional investors may pay more attention to DeFi because of the activities of Meme Coins.
Are Tokens in Cryptocurrency Overvalued or Undervalued?
Laura mentioned that there are some capital allocation issues in the market, which may lead to strange phenomena in the valuation of cryptocurrencies. She asked Jordi and Arthur what they think are the main problems in valuing tokens.
Jordi's opinion
Jordi pointed out that the current discussion on token valuation in the market is mainly about relative value comparison, such as comparing the value of one chain with another. He believes that this approach is not a good basic framework because it may lead to misallocation of capital. He emphasized that the market needs a better framework to evaluate the value of tokens, and mentioned some articles from private equity investors, calling for the establishment of a systematic and easy-to-understand valuation framework.
Arthur's opinion
Arthur supplemented Jordi's point of view, arguing that although there have been many attempts to establish valuation frameworks for crypto assets, these frameworks have never been widely accepted. He believes that the particularity of Bitcoin makes its valuation mainly rely on relative comparisons rather than cash flow analysis. He pointed out that Bitcoin, as the largest crypto asset, sets the valuation tone of the market, which affects the valuation of other assets.
He also mentioned that with the reduction of "idiot" ordinary investors in the market, the valuation of assets has become more realistic. He believes that this is positive for the industry because it means that there will no longer be meaningless high valuations in the market and the rationality of assets will increase.
Jordi's Different View
Jordi disagreed, saying that the market is still in its early stages and is still affected by “dumb” money. He mentioned that although Bitcoin’s valuation methods have become more sophisticated, there is still a lot of irrational capital flow in the market.
Arthur's comments
Arthur further added that professional investors usually have relatively clear ideas when valuing certain assets, especially in the DeFi field. He believes that the differences among professional investors are mainly about expectations for the future and whether assets have a monetary premium, rather than how to value them.
Laura's Summary
Laura concluded that since the purpose and mission of each asset are different, it may not be appropriate to try to establish a standardized valuation framework. She believes that investors should understand the characteristics and token economics of each asset to better judge its value.
Are Liquid Venture Capital Investments More Advantageous?
Laura asked a question about Liquidity Venture Capital, asking about the “Liquidity Venture Capital” approach mentioned in a previous article by Arthur, and how this approach compares to other investment methods, especially its advantages in the cryptocurrency field.
Arthur's View
Arthur explained the concept of liquidity venture capital, arguing that this investment method is mainly aimed at crypto assets with good liquidity, especially non-mainstream coins (non-Bitcoin and Ethereum). He believes that this investment method provides the best risk-adjusted returns in the crypto market.
He pointed out that the advantage of liquid venture capital is that investors can simultaneously obtain potentially high returns while maintaining flexibility to manage risks. In the traditional financial sector, investors usually face a trade-off between liquidity and returns: if they want to obtain high returns from start-ups, they must accept a longer period of capital lock-up (usually 5 to 10 years); and if they choose a more liquid investment, it is difficult to achieve a return of up to 50 times or 100 times.
However, in the cryptocurrency market, Arthur believes that investors can enjoy the best of both worlds. In the past two market cycles, many crypto assets have achieved 20x, 50x, or even 200x returns on the public market. He firmly believes that this will still be possible in the future.
Bitcoin and DeFi: Untapped Potential?
Laura raised a question about the combination of Bitcoin and decentralized finance ( DeFi ). She mentioned that in the past year, Bitcoin has gradually entered the DeFi field, including Bitcoin's Layer 2 solution, Bitcoin staking , and new developments in WBTC (Wrapped Bitcoin) related to Justin Sun. She wanted to know more about the impact that Bitcoin may have on DeFi after entering the DeFi world.
Jordi's opinion
Jordi expressed his views on the potential of Bitcoin in the DeFi field. He believes that Bitcoin has performed well as an asset, indicating that it still has a lot of potential to be tapped. Although many Western Bitcoin enthusiasts hold a purist attitude and are reluctant to use their Bitcoin, in Asia, more and more people want to actively participate in activities on the chain. He believes that this idea will promote the application of Bitcoin in DeFi.
He mentioned that WBTC currently has some problems, but projects like Maker's CVBTC and Mantle's FBTC are working hard to unlock the potential of Bitcoin. He believes that projects that can create a good ecosystem will succeed, especially Mantle because it not only focuses on the asset itself, but also focuses on the integration of applications and ecological partners.
Arthur's opinion
Arthur agrees with Jordi and believes that it would be very good news if more Bitcoin could be introduced into the DeFi ecosystem, whether through Bitcoin's Layer 2 solution or other smart contract platforms such as Solana and Ethereum. He said it is not clear which method will gain the largest market share, but he believes that the market will find the most successful path.
User experience challenges
Laura mentioned that despite her interest in cryptocurrencies, she was often confused about how to actually use them.
Jordi also emphasized the importance of user experience, believing that a good user experience can attract more people to participate. He mentioned that more and more projects in the market are beginning to focus on culture and user experience, not just the technology itself.
Both Jordi and Arthur are optimistic about the potential of Bitcoin in the DeFi field, and believe that as more Bitcoin enters the DeFi ecosystem, the market will usher in new opportunities. Good user experience and ecosystem integration will be key factors in promoting this process. As the market matures, how to effectively combine Bitcoin with DeFi will be a trend worth paying attention to in the future.
